Will Tesla’s Potential Stock Split Make You Rich?
You’re here (TSLA -0.37% ) has garnered a lot of attention since its 5-for-1 stock split in 2020, and the light continues to shine on the electric vehicle maker. Last month, Tesla announced plans for a possible stock split, and the company’s stock price soared.
If you’re considering getting a piece of Tesla stock, don’t let the potential stock split be the only number driving your decision. There are more important factors to consider if you want to stand a chance of profiting from the stocks you buy.
Tesla’s big announcement
Tesla’s management team always surprises the media with jaw-dropping news. Last month was no exception. On Monday, March 28, Tesla announced plans to conduct a stock split to offer shareholders a stock dividend.
The stock split ratio and dates have yet to be released. Nothing is set in stone until shareholders vote at the next shareholders’ meeting. Last year’s meeting was in October, so we’re probably months away from a final decision.
Tesla’s last stock split took place in August 2020. Investors received four additional shares for each share held in their portfolio. From the announcement of the stock split on August 11 to the 5-for-1 stock split on August 31, Tesla’s stock price has soared 80%. While those returns were impressive, that doesn’t necessarily mean that the next potential stock split will produce the same results.
Behind the scenes of a stock split
Stock splits are known to get investors excited, but they might not be worth all the hype. When a company announces a stock split, all registered shareholders before the deadline will receive more shares of the company. While this may seem like a win for investors, it’s just a cosmetic change. The company just cuts every stock in your portfolio into smaller pieces.
Let’s say you buy two Tesla shares for $1,000 per share. If the company pursues a 5-for-1 stock split again, you will have 10 shares valued at $200 each if the stock price remains the same. If you sold half of your shares, you would get $1,000 in your account.
Tesla’s potential stock split won’t guarantee your wealth
A stock split will make Tesla’s four-digit share price more affordable for the average investor. After the stock split, all investors can buy a full share of Tesla at a lower price.
It is not uncommon for a company’s stock price to explode after a stock split. However, you cannot guarantee that Tesla shares will rise after the stock split. The best decision you can make is to invest in a business based on the health of the underlying business. When you buy stock in a company, you are essentially buying a part of the business, so you want to make sure that the business can generate profits in the future.
Here are some metrics you want to keep an eye on if you want to unlock wealth in the stock market:
Don’t lose sight of what really matters as an investor
Although a stock split sounds fancy, it’s not as glamorous as you might think. A stock split, by itself, will not lead to millions of dollars in your account overnight. If you were hoping to go from rags to riches overnight, a stock split won’t do the trick.
That’s not to say you shouldn’t consider investing in Tesla stocks. Pay attention to key financial metrics, then go beyond the numbers to determine if the company deserves a place in your portfolio. If you do your research now, you can position yourself to attract market-beating returns that can bring you closer to building wealth in the stock market over time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.